Almost everyone thinks about early retirement at some point in their career. The thought of being free from the corporate grind and spending more time with family and friends is not just for daydreamers.
Retiring early can be a reality, as long as you have a plan in place when it comes time to leave your old job. Here are three essential steps to follow if you want to leave the workplace behind for good:
Step 1: Reduce Your Expenses
When most people start thinking about their retirement plan, they begin by assessing their savings. However, it often makes more sense to measure your financial future in terms of your costs. It is much easier to cut down on monetary obligations as opposed to creating new income streams.
For example, do you really need that 4 bedroom home for just you and your spouse? How much money would you save by renting a smaller place? When you consider home improvement expenses, real estate taxes, and potential mortgage costs, the savings associated with downsizing could be significant.
Step 2: Cover Your Health Expenses
Probably the biggest expense you’ll face with early retirement is health care. Independent coverage is expensive, in the neighborhood of $1,000 to $3,000 per month, so this is something you need to consider in advance.
If you live in America then you will eventually benefit from government-sponsored Medicare coverage. Just keep in mind that it doesn’t begin until age 65. If you retire early, say at the age of 55, then you would need enough savings to cover ten years of health insurance. This won’t be cheap, and you can expect the costs to rise annually.
Step 3: Calculate Your Income
It is great to see those large dollar amounts in your retirement plan reports, but have you ever calculated what that money is actually worth on a monthly basis? Let’s say you have $500,000 put away in your retirement plan. This is obviously a hefty chunk of change if you were to receive it all in one payment. But when you divide it by thirty years, it only averages out to a little over $16,000 per year. Yes, you will gain more interest over the payment years, but at most that will only add a couple thousand dollars to your annual distributions.
If early retirement is on your wish list then the time to start planning is now! The younger you are, the more options you have. One mistake you don’t want to make is to retire from a job that provides full benefits, only to find out you need to go back to work. Part-time employment can negatively impact your tax rate and Social Security options, so it is safer to commit to retirement from the start. Following these tips will give you the best chance to achieve your goals after your career has ended.
About the author: Jim Blair is a former Social Security manager and author of the Social Security Retirement Guide.
Photo credit: 401k